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5 April, 06:41

What is the Present Value of the following cash flows at an interest rate of 7% AER? A.) $900 received one year from now. B.) $900 received 10 years from now. C.) $900 received each year beginning 1 year from now and ending in 10 years. D.) $900 received each year beginning 1 year from now and continuing forever.

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  1. 5 April, 06:58
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    A.) $900 received one year from now.

    $841.12

    B.) $900 received 10 years from now.

    $457.51

    C.) $900 received each year beginning 1 year from now and ending in 10 years.

    $6321.22

    D.) $900 received each year beginning 1 year from now and continuing forever.

    $12,857.14

    Explanation:

    Interest Rate = 7%

    A.)

    Cash flow = $900

    Period = 1 year

    PV = FV / (1 + r) ^n

    PV = $900 / (1 + 0.07) ^1

    PV = $900 / 1.07

    PV = $841.12

    B.)

    Cash flow = $900

    Period = 10 year

    PV = FV / (1 + r) ^n

    PV = $900 / (1 + 0.07) ^10

    PV = $900 / 1.96715

    PV = $457.51

    C.)

    Cash flow = $900

    Period = 10 year

    P = [ r x PV / 1 - (1 + r) - n]

    $900 = [ 0.07 x PV / 1 - (1 + 0.07) - 10]

    $900 = [ 0.07 x PV / 1 - (1.07) - 10]

    PV = ($900 x 0.491651) / 0.07

    PV = $6321.22

    D.)

    Cash flow = $900

    Period = 10 year

    PV = Pmt / i

    PV = $900 / 0.07

    PV = $12,857.14
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